Preferred stock record date: Overview, definition, and example
What is the preferred stock record date?
The preferred stock record date is the specific date set by a company to determine which shareholders are eligible to receive dividends or other benefits associated with owning preferred stock. Preferred stockholders typically receive fixed dividends before common stockholders, and the record date is used to identify the shareholders who will receive these dividends for a particular period. Only shareholders who are on the company’s books as of the record date are eligible to receive the dividend payment or other benefits.
For example, if your company declares a dividend for preferred stockholders, the record date determines who will receive that dividend—if an individual is listed as a shareholder on that date, they will receive the dividend, regardless of whether they sell the stock after the record date.
Why is the preferred stock record date important?
The preferred stock record date is important because it ensures clarity and fairness in the distribution of dividends or other benefits. It provides a clear cut-off date, so both the company and shareholders know who qualifies for dividends. This helps prevent confusion or disputes over who is entitled to receive the benefits associated with owning preferred stock.
For SMBs, maintaining an accurate record of stockholders and establishing a clear record date is essential for good governance and for ensuring that dividend distributions are handled appropriately.
Understanding the preferred stock record date through an example
Imagine your small business has issued preferred stock to investors, and you decide to declare a dividend of $1 per share. The company sets a preferred stock record date of January 15th. All preferred stockholders who are listed on the company’s records as of January 15th will be eligible to receive the dividend payment. If an investor sells their preferred stock on January 16th, they will not receive the dividend for that period, as they were not listed as a shareholder on the record date.
In another example, if your business has a group of preferred stockholders who hold a significant portion of shares, setting a record date ensures that only the current holders, and not anyone who purchases shares after the date, will receive the dividend payment.
An example of preferred stock record date in action
Here’s how the preferred stock record date might be referenced in a shareholder agreement or corporate governance document:
“The company will set a preferred stock record date of March 31st for determining the shareholders eligible to receive the declared dividend. Only shareholders holding preferred stock as of the record date will be entitled to the dividend payment, which will be distributed on April 15th.”
Conclusion
The preferred stock record date is the date a company uses to determine which shareholders are eligible to receive dividends or other benefits from owning preferred stock. For SMBs, setting and communicating the record date is crucial for ensuring that dividend distributions are handled fairly and accurately. It helps businesses maintain good recordkeeping and transparency with shareholders.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.